The Long Arm of the…Lanham Act?
“A ruling that resolves the proper test for extraterritorial application of the Lanham Act is a likely and welcome outcome. A ruling that extraterritorially applies the Lanham Act in this case would enhance the value, and underscore the importance, of U.S. trademark registrations.”
Can the Lanham Act apply to the conduct of foreign entities occurring entirely outside the United States and, if so, what is the test? The Supreme Court will soon decide this issue in Abitron v. Hetronic, potentially resolving a long-standing circuit split where six different tests presently co-exist. It will mark the first time since the Court’s 1952 ruling in Steele v. Bulova Watch Co. that it has spoken on extraterritoriality as it relates to the Lanham Act. Steele found that the Lanham Act does apply to a U.S. citizen using a registered U.S. trademark on spurious Bulova watches, many of which were bought by U.S. citizens in Mexico and brought back to the United States. Steele did not address whether the defendant’s U.S. citizenship, or his sourcing of parts from U.S. suppliers, were necessary conditions to subject matter jurisdiction. Enter Hetronic.
Procedural History
Hetronic Intl. is a U.S. company and maker of remote controls for cranes that engaged two European businesses to serve as distributors. An Austrian company, Hydronic Steuersysteme GmbH, became a distributor in 2006, and Hydronic Germany became a distributor in 2007. The relationship was uneventful until roughly 2011, when Hydronic and a successor company, Hetronic Germany, concluded that they owned Hetronic’s trademarks and other IP based upon a “creative” read of an R&D contract between the parties. Around that time, the distributors reverse engineered Hetronic’s products and began selling exact knockoffs under the Hetronic brand in Europe, using parts sourced entirely from European suppliers. When Hetronic learned of this in 2014 it terminated the distributors’ contracts and sued for breach and for Lanham Act violations. Hetronic won a $115 million jury verdict in the Western District of Oklahoma, $96 million of which were Lanham Act damages. On appeal to the Tenth Circuit, the distributors acknowledged that the Lanham Act can sometimes apply extraterritorially but argued that the trial court erred by applying it to European business entities making sales outside the United States to other foreign businesses.
The Court of Appeals for the Tenth Circuit affirmed the trial court’s extraterritorial application of the Lanham Act, basing its decision on a novel test. The Tenth Circuit first noted five different tests articulated by the First, Second, Fourth, Fifth, and Ninth circuits, each bearing similarity to the others, especially in that they all require some degree of effect on U.S. commerce. The Second Circuit’s Vanity Fair test requires a “substantial effect”. The Fourth and Fifth circuits have adopted the Vanity Fair test but adjusted the degree of effect to “significant effect” (Fourth) or “some effect” (Fifth). The Ninth Circuit also requires “some effect” on U.S. commerce, but differs in other material respects, including that the Ninth Circuit’s test derives from Sherman Act antitrust principles. The First Circuit rejects both the Vanity Fair test and the Ninth Circuit’s antitrust test, simply holding that “subject matter jurisdiction under the Lanham Act is proper only if the complained-of activities have a substantial effect on United States commerce, viewed in light of the purposes of the Lanham Act.” Emphasis added.
Having noted all five pre-existing tests for extraterritorial application of the Lanham Act, the Tenth Circuit then articulated a sixth test, with three factors: (1) is the defendant a U.S. citizen, (2) does the defendant’s conduct have a “substantial effect” on U.S. commerce, and (3) would “extraterritorial application of the Lanham Act… create a conflict with trademark rights established under the relevant foreign law”. In this case the distributors are all foreign entities, and the question of a conflict with foreign law was never raised at trial, so the court’s decision turned on whether the distributors’ conduct had a substantial effect on U.S. commerce. The Tenth Circuit found in the affirmative for two reasons. First, “over €1.7 million of [the distributors’] foreign sales ended up in the United States”. Although the distributors only sold to European entities, the record suggests that the distributors knew that the goods were destined for the United States. And second, the record contains a litany of evidence of actual confusion where U.S. consumers contacted the European distributors by mistake, frequently sending products to the wrong company for repair. Notably, the Tenth Circuit also indicated that, even setting aside the direct evidence of actual confusion, the amount of infringing goods (over €1.7 million worth) was so great that “confusion and reputational harm … can … be inferred.” Therefore, the Tenth Circuit found that extraterritorial application of the Lanham Act was proper in this case because infringing goods sold in Europe eventually entered the U.S. in significant quantities and caused actual consumer confusion.
SCOTUS Steps In
On appeal to the Supreme Court, the distributors argue that Steele does not justify Lanham Act jurisdiction in this case because Steele dealt with the conduct of a U.S. citizen who bought components in the U.S. and had them shipped to Mexico where the infringing conduct took place. The distributors further argue that the Court’s more recent extraterritoriality analysis in RJR Nabisco, Inc. v. European Community “honed” its Steele ruling, suggesting that RJR militates against Lanham Act jurisdiction in this case. In RJR, the Court synthesized its extraterritoriality jurisprudence in Kiobel and Morrison to establish a two-step framework. Notably, none of RJR, Kiobel, or Morrison were Lanham Act cases. RJR is a RICO case, Morrison is a securities case, and Kiobel deals with the Alien Tort Statute (28 U.S.C.A. § 1350) for “violations of the law of nations” by the Nigerian government. Though a RICO case, RJR asks whether a federal statute “gives a clear, affirmative indication that it applies extraterritorially” and, if not, then it asks, “whether the case involves a domestic application of the statute”, even if other conduct occurred abroad. Under RJR, in the absence of a “clear indication” that congress intended an extraterritorial effect, or in the absence of a “domestic application” of the statute, Lanham Act jurisdiction would not be proper. The Lanham Act does not include an explicit indication that it is to have extraterritorial effect and, as in Steele, the defendant’s trademark use occurred abroad. The Court in Steele said:
“Even when most jealously read, that Act’s sweeping reach into ‘all commerce which may lawfully be regulated by Congress’ does not constrict prior law or deprive courts of jurisdiction previously exercised. We do not deem material that petitioner affixed the mark ‘Bulova’ in Mexico City rather than here, or that his purchases in the United States when viewed in isolation do not violate any of our laws. They were essential steps in the course of business consummated abroad; acts in themselves legal lose that character when they become part of an unlawful scheme.”
To the extent that RJR’s two-prong test requires a “clear indication” or “domestic application”, extending the rule of RJR to the Lanham Act would seem to overrule Steele rather than hone it, a point that the distributors’ counsel denied in oral argument at the Supreme Court:
“JUSTICE SOTOMAYOR: Doesn’t your view overrule Steele?
WALKER: It –it doesn’t. So –
JUSTICE SOTOMAYOR: Explain how.
WALKER: Yeah. So Steele, by its terms, from its very first sentence and throughout its rationale, addressed how the Act applies to United States citizens who are acting abroad and also acting within the United States. It did not address how it applies to foreign defendants.”
Potential Outcomes
The Supreme Court heard oral arguments in this case on March 21, 2023, and is expected to issue its opinion in the coming weeks. The fact pattern here is remarkably similar to Steele, with two important exceptions, namely, the defendants are not U.S. citizens, and no parts were sourced from the United States. A ruling that resolves the proper test for extraterritorial application of the Lanham Act is a likely and welcome outcome. A ruling that extraterritorially applies the Lanham Act in this case would enhance the value, and underscore the importance, of U.S. trademark registrations, making it more difficult for foreign actors to cause confusion among U.S. consumers by cloaking their conduct behind foreign intermediaries.
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Image ID: 21675945
Author: 3dphoto
